SPX and NDX Update: More Selling Still to Come?

While the market has been hitting all  my projections perfectly, every night I look at the charts lately seems harder than the night before.  There are a lot of possibilities on the table right now, and because it's been range-bound recently, the market hasn't given much relevant info for us technical analysts to work with.  So I'm going to present some "best guesses" today, along with some indicators which support them.

I'm just going to roll right into the charts here, because outside of patting myself on the back for my flawless record of "no QE3 today" predictions, there isn't much else to talk about.  The first chart I'd like to share is one which has nothing to do with Elliott Wave Theory, but is one of the confirming indicators I like to use to help point the way.

The chart below shows the Volatility Index (VIX), also known as the "fear index."  When the market goes down, the VIX usually goes up, and vice-versa.  This week, however, the VIX has been falling in concert with the market; and I mentioned yesterday that the majority of the time, this means the market will make lower lows.  There are two things I'd like to call attention to on this chart: one is that the VIX bumped into its lower Bollinger band yesterday, and the other is the fact that VIX formed a possible reversal bar on Tuesday.  The chart highlights the last six months of occurences of this bar, and shows that 70% of the time, it leads to a meaningful move up in the VIX.

 
If you compare the top panel to the S&P 500 (SPX) chart in the lower panel, you can see that 70% of the time, this signal is quite bearish for stocks.

So, now we have some probabilities to work with on the Elliott wave counts.  The first count I'd like to share is the one I'm favoring, and it's the most bearish possible count.  I'm using the Nasdaq 100 (NDX) to illustrate this count, because it shows an interesting fractal relationship between the current move and the beginning of the November decline (highlighted in yellow).

This count believes the "Santa rally" is over.  The bullish alternate count I've mentioned for over a month still cannot be ruled out, though.  I'm trying to take it day-by-day here, because the structure of the waves lately is somewhat infuriating -- and even though I've been nailing the short term moves of late, the market's larger intentions are still somewhat veiled.

On the NDX chart shown above, an upside break of the falling trendline would be first warning to be on alert for bullish potential, and trade above any of the second waves (the first level to watch is 2316.90) would be a huge red flag to that count. 

The next chart I'd like to share is at the request of several readers.  Apparently, a fair number of Elliotticians are now calling the decline an ending diagonal.  I have a problem with that interpretation, and the chart below shows why.  As the name implies, an "ending diagonal" comes at the end of a trend; and when we chart a market other than the SPX, we can see that this interpretation makes little sense.  The diagonal on this chart is the entirety of the new trend; which means it could be the start of a new trend -- i.e.- a leading diagonal -- but not the end of one.

The chart also illustrates what could happen if this is a leading diagonal.  Leading (and ending) diagonals are known in classic technical analysis as "wedges" and a breakouts often results in the market returning to the price level at the start of the pattern.  Significant new lows beneath Tuesday's should knock this count out of consideration; or conversely, an upside breakout above the red trendline would be fair warning that this was unfolding.

The final chart is my "best guess" on the short-term intentions of this market.  The tiniest waveforms are a bit sketchy, so use this however you see fit, or ignore it completely if you want.  My best guess is that yesterday's low was the bottom of the smaller internal third wave of the current wave, and the market still needs to form the fourth and fifth wave. 

The chart also shows how one could count the decline as a complete correction to fit the bullish alternate count.  The market has now traded markedly into the target zone for that count, and has fulfilled the requirements for a B-wave correction under the terms of that bullish count.

However, even if that bullish count is playing out, based on my VIX studies, the market still has a 70% probability of making new lows before forming a meaningful bottom. 

Please note that in the above chart, the 1230 target was already hit in the overnight futures session, and as such may be complete.  With this market, it's tough to say.

In conclusion, there has been nothing to change my long and medium term bearish stance, and the probabilities argue in favor of a short-term bearish stance as well.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com